Some economic analysts and people in general do not
consider the leap-frog movement of KSE-100 index sustainable. Whereas,
equities analysts predict that the index may touch 2,600 level shortly
and still continue its upward movement. They also say that the movement
this time is not similar to that of nineties. Most of the analysts,
believing in strong fundamentals enjoyed by Pakistan, consider the index
movement sustainable, they also express certain apprehensions due to
prevailing political uncertainties. They link continuity of economic and
foreign policies and process of privatization with the stance taken by
the new incumbents.
The concerns are that the politicians have not been
able to reach any consensus regarding the future prime minister, which
has also led to postponement of inaugural session of the newly elected
national assembly. The fears is, if the politicians and elected
representatives are unable to resolve the prevailing situation how will
they address more sensitive issues like foreign policy and economic
agenda, the two grossly interrelated and interdependent issues.
The positive point is, despite an unclear/uncertain
political scenario, the KSE-100 index has shown sustained upward
movement in the post October 10, era. Do the investors give less
importance to prevailing political scenario? Or, they believe that
economic agenda will prevail over the composition of future government.
The overwhelming feeling is that politicians are talking about non-core
issues, whereas the focal point should have been continuity of economic
reforms or coming up with more pragmatic reforms. The reforms which can
address, eroding purchasing power, unemployment, poverty alleviation,
and, above all, Pakistan's image as investor friendly country.
Is this appropriate time for investment in equities.
May be not, if one looks at the history of the KSE-100 index. Since late
1991 the KSE-100 index has ranged between 766 to 2,661 points. Most of
the time it has moved between 1,100 to 1,900 points. Therefore, one tend
to believe that investing at this high level may not be prudent.
Investors get a feeling that the index over 1,900 levels is pricey.
Therefore, this become a strong psychological barrier.
However, if one makes a deeper probe, the findings
are contrary. The fundamentals like earnings growth, price-to-earnings
ratio, price-to-book value, return on equity and dividend yield are very
attractive even at this point. Therefore, evaluating the worth of
Pakistan's stock market, simply by looking at KSE-100 index is
incorrect. According to report from InvestCap, the current KSE-100 index
level is overstated by around 400 points. The analysis shows that an
index without adjusting for cash dividends should have been at around
1,300-1,400 points and not 1,770 points as the KSE-100 index was at June
However, another report from AKD Securities, suggests
that it is important to understand the factors which have driven the
market to 8-year highs. According to the report, the market driver has
been the substantial easing of monetary policy since 1st July, 2001 and
the enhanced ability of the central bank to sustain the easing. The
monetary ease was enabled by a host of fundamental changes in the
external account. In future, the market driving force will be provided
by improvement of macro situation and corporate profitability.
In terms of macro situation, Pakistan has seen a
paradigm shift. Market strategists and fund managers have, from as back
as 1996, consistently sought to identify which macro factors led to and
have kept portfolio investment out of the KSE. The list is almost
endless and is subject to change with the very fluid circumstances that
have been part and parcel of investing in Pakistani equities.
As regards the similarity or dis-similarity of
current index movement with the strides of nineties a fact must be kept
in mind. The dominant investment themes in the 1990s were
liberalization, deregulation, globalization and privatization, where
Pakistan faltered in the later part of the decade. The dominant theme,
going forward, will be domestic demand providing impetus to
Those investors, who feel that they have missed the
boat, should not have regrets. The KSE has historically given investors
several entry/exit points during a cycle. Therefore, if they wish to
still make some gains, they should focus on dividend yield. Growth
prospects are bright for companies due to greater fiscal space generated
through lower interest rate profile and growing emphasis on consumer
finance. The spread between dividend yield and the 5-year Pakistan
Investment Bond has narrowed significantly.
Saying this, there is a word of caution for small
investors. First they should not follow herd mentality and before making
any investment decision must also do their home work. They must go
through the research reports prepared by various brokerage house. They
should also develop a diversified investment portfolio to minimize their